Markets & Finance

S&P: Still Hold Delta Amid Fare Cuts

January 04, 2005

Delta Air Lines (DAL): Reiterates 3 STARS (hold)

Analyst: James Corridore

Delta Air Lines is capping economy fares in the continental U.S. at $499 each way, and first class at $599 each way, a potential fare cut of up to 50%. We think Delta is trying to get a bigger share of business travel, but also that these fare cuts are likely to be matched by competitors. We think these changes could prove stimulative to business travel in the long term, but cutting fares in a weak revenue environment is likely to exacerbate losses in the near term. We wouldn't add to positions but would hold the shares, due to recent pullbacks in oil prices and to the headway the company has made with labor costs.

Siebel Systems (SEBL): Reiterates 3 STARS (hold):

Analyst: Jonathan Rudy, CFA, Scott Kessler

This morning, Siebel preannounced fourth-quarter revenues above our projection and earnings per share equal to our high-end estimate. Siebel expects fourth-quarter revenues of $387 to $390 million, with a mid-point 14% higher than our forecast. The company foresees earnings per share of 8 cents, in line with our expectation and a penny above the Street consensus. Siebel did not cite a reason for the favorable preannouncement, but we think the company could have benefited from strong enterprise spending and a potential budget flush in the fourth quarter. However, we see Siebel's shares as fully valued, owing in part to our view of recent inconsistent execution.

Nordstrom (JWN): Maintains 3 STARS (hold)

Analyst: Jason Asaeda

Same-store sales rose 9.3% in December, beating our 3.5% growth projection. We think that self-gifting contributed to sales strength in women's shoes, accessories and juniors apparel, and that last-minute holiday shopping and the start of Nordstrom's semi-annual men's sale led to stronger sales in the back half of the month. We are increasing our fiscal 2005 (ending January) earnings per share estimate by 5 cents to $2.77 and fiscal 2006's by 8 cents to $3.15, since we think robust holiday sales could signal a strong spring selling season. We are raising our blended p-e and discounted-cash-flow-based 12-month target price by $3 to $50.

OfficeMax (OMX): Maintains 3 STARS (hold)

Analyst: Michael Souers

OfficeMax announced the resignation of its retail division president. The company says the resignation is unrelated to its investigation into $3.3 million in claims billed to a vendor. We view the resignation as another sign that the retail division has continued to perform sluggishly, and believe the search for a replacement will likely only delay the division's turnaround. We are reducing our 2004 and 2005 earnings per share estimates to $1.33 and $1.80 from $1.34 and $1.95. However, we are leaving our 12-month discounted-cash-flow-based target at $32, or 18 times our 2005 earnings per share estimate.

After the December merger of Millennium Chemicals, Lyondell owns 100% of the Equistar venture, up from 70.5%. With a cyclical recovery in petrochemicals, Equistar resumed cash distributions in 2004, and Lyondell has called a total of $500 million of debt. Millenium Chemicals had been the second largest global titanium pigment maker, a less cyclical product than petrochemicals. With the upswing in Equistar and debt reduction, we now see 2005 earnings per share of $1.50, up from $1.00. Assuming further improvement in 2006 and a peak-of-cycle p-e in high single-digits, we have raised our 12-month target price to $30 from $22.

RealNetworks (RNWK): Reiterates 3 STARS (hold)

Analyst: Scott Kessler

Shares are up smartly in pre-market trading, following new distribution announcements related to music and games, which we view favorably. RealNetworks will expand its existing relationship with Comcast by offering its premium online radio service to Comcast's more than 6.5 million broadband subscribers, to begin by June 2005. RealNetworks will also expand its casual games business through partnerships with RTL in Germany, Free in France, and Telewest in the U.K. Based on revised discounted-cash-flow analysis, we are raising our 12-month target price to $7 from $5.50.